Competition in the training market Editors Tom Karmel Francesca Beddie Susan Dawe
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- Introduction
- Competing models
- Allocative mechanisms in higher education
- Allocative mechanisms in vocational education
ReferencesChapman, B, Rodrigues, M & Ryan, C 2007, HECS for TAFE: The case for extending income contingent loans to the vocational education and training sector, Treasury working paper 2007-2, Treasury, Canberra, viewed April 2007, Karmel, T, Mlotkowski, P & Awodeyi, T 2008, Is VET vocational?: The relevance of training to the occupations of vocational education and training graduates, NCVER, Adelaide, viewed October 2008, Misko, J & Halliday-Wynes, S (forthcoming), Working paper: Tracking our success: How TAFE institutes evaluate their effectiveness and efficiency, NCVER, Adelaide. Markets and central planning in meeting labour market needs: Lessons from higher education Andrew Norton
Government responses to employer complaints about their difficulties in finding suitable workers differ around the country, but all plan to increase the number of people with formal post-secondary qualifications, particularly vocational qualifications. While this is likely to benefit many individuals, over-qualification is already widespread in the Australian labour market. This exists when workers have formal qualifications in excess of what is required for their jobs. For example, the Australian Bureau of Statistics (ABS) Education and Work survey finds that 26% of university graduates hold jobs for which degrees are not typically required (ABS 2008b).iii On a more subjective measure, 10–15% of workers disagree that they use their skills and abilities in their job (Watson 2008, p.11). Over-education or unused skills constitute a mismatched labour market as experienced from the employee side. Some mismatch between what employers want and what potential employees can offer is inevitable. The demand for skills is affected by technological innovation, by structural shifts in the economy, and by the business cycle. None of these can easily be predicted with precision. Unanticipated skills shortages are most likely during periods of rapid growth, as seen in the mining sector in recent years. In recessions, skilled workers have more trouble finding appropriate employment (see Norton 2007, figure 1, p.4). Gearing the skills supply to match boom demands means that some human capital will normally be underutilised. While for employers this is better than boom-time shortages, it is not self-evidently the right policy goal. Skills acquisition has costs to both individuals and taxpayers. The supply of skilled labour also varies, and in ways that can only be partly predicted by those responsible for education and training. Many people work in occupations other than those exactly matching their formal qualifications. While the government can control the flow of skilled immigrants, it has much less control over temporary and permanent emigration by skilled Australians. As the skilled labour pool has feminised, it has became more difficult to calculate how many hours of work can be expected from each qualified person. Women are more likely than men to move in and out of the labour market and between full- and part-time work. Although a labour-market perfect match is not possible, trying to improve the match is a reasonable policy goal, given the co-existence of skills shortages in the labour force and skills surpluses among some workers. This paper will look at the relative merits of central planning and markets in delivering workers with formal qualifications to the labour market. In particular, it will examine whether there are lessons—positive or negative—from the higher education sector for the vocational education sector. Competing modelsIn the current Australian debate around post-secondary education funding, there are two broadly competing models for allocating students and funding between education providers: central allocation and market distribution. With central allocation, a government agency (or agencies, in vocational education) determines workforce needs and then allocates education and training places accordingly. Students are not coerced into taking these places, but central planners steer their choices by limiting the available options or by creating incentives to take particular courses. Under market distribution, the interaction of education providers and students determines how education and training places are allocated. Voucher systems combine elements of both models, with the public subsidy element altering price signals to influence education providers and students, while leaving markets as the institutional setting in which final allocative decisions are made. The two broad models have been supported or opposed, based on issues of access by disadvantaged groups, other community obligations performed by education providers, and course quality. This paper leaves these considerations to one side to focus on each system’s strengths and weaknesses in providing the right mix of suitably qualified workers. This is a debate about information and coordination. Which set of institutions can gather the most relevant and useful information and then use that information to guide allocative decisions? Central allocation agencies can use a wide range of data-gathering techniques to build a picture of likely workforce needs. These can include census and survey research on the skills available in the current workforce, consultations with employers about their short-to-medium-term requirements, and computer modelling of long-term economic trends. Although students’ interests in finding work are important in central planning, their actual personal course and career preferences are not necessarily collected or considered in the planning process. Using the information it has collected, a central planner can then coordinate the relevant education and training. The mechanism for doing this varies and can include both direct allocation and quasi-market mechanisms (discussed further below). Ideally, this mix of information-gathering and coordination minimises the under- or oversupply that may result if higher education providers and students act with imperfect knowledge of the labour market and of each other’s decisions. Under a market system, education providers can also analyse economic and demographic trends affecting their business and use this analysis to guide which courses they offer students. Only larger providers are likely to be able to afford this research if it is not publicly available. The most important source of information for market-oriented institutions is what they learn in the market itself. From their routine interactions, education providers acquire knowledge of local business conditions and of particular clients, when they are employers. From applications they receive and contracts they sign with corporate clients, education providers learn about demand for their courses. This knowledge, which may not be formally collected or analysed even at the provider level, is hard for central planners to collect and use. Employers as customers of education and training providers are likely to supply high-quality information, since often they will be filling known skills deficiencies within their firms. However, students seeking to enter the labour force or to change careers may have only a limited understanding of labour market trends. This is one potential problem with market systems to be discussed later in the paper. However, students know their own interests and aptitudes better than either higher education providers or central planners. Ignoring this information can lead to students not taking up offers, dropping out of courses, or not continuing with the career intended by central planners. Market systems, by contrast, regard students’ preferences as important sources of information. Coordinated systems in the marketplace result from high levels of institutional autonomy and flexibility, combined with strong incentives to act on the information they receive. These incentives come in the form of losing or gaining students and income. Undersupply is signalled by strong demand for places; oversupply by the reverse. Coordination is achieved by continual readjustment in the light of market information, rather than by regional or national plans setting out in advance what will be taught, and when and where it will be taught. Allocative mechanisms in higher educationIn higher education, government-funded places are distributed centrally to public universities and a small number of other institutions offering ‘national priority’ courses, mostly in teaching and nursing. There is no formal procedure for gaining access to Commonwealth-supported places. Institutions are added to the system on an ad hoc basis after lobbying the federal government. Dozens of institutions, other than the public universities, including TAFE institutes, offer higher education courses on a full-fee basis. However, at the undergraduate level Commonwealth central allocation is the dominant steering mechanism determining how many places are allocated to each institution and field of study. Including the full-fee domestic undergraduate places at public universities, which are to be phased out from 2009, only 7% of undergraduate places were allocated by market forces in 2007.iv The federal government uses ‘funding agreements’ with higher education providers to distribute its places. These agreements set out the total number of Commonwealth-supported places to be provided and they determine which ‘funding cluster’ these places will be in. Funding clusters correspond to fields of study; some clusters are unique to one field of study, while others cover several fields.v Universities can generally freely move places within clusters. For example, they could switch places between law and accounting, between computing and social studies, or between dentistry and veterinary science.vi Places can be moved between clusters, but requirements for minimum total enrolments and maximum Commonwealth expenditure make this difficult.vii Before 2005, universities had more flexibility to move places between disciplines, while still meeting overall target enrolments.viii New places are allocated particularly prescriptively, with specific courses and campuses usually set, rather than just funding clusters and institutions. Although in recent years labour market shortages have influenced the distribution of these new places, there is no general central planning of the higher education sector. So, while the funding agreement mechanism could steer the higher education system according to demographic and workforce projections, in practice this has not happened. Instead, there have been ad hoc responses to existing demands for more workers in particular occupations. In the absence of new places, each year the same institutions tend to get roughly the same number of places in the same fields of study. Market forces have a much greater role in allocating postgraduate places. In 2007, approximately 70% of domestic places were provided on a market basis, with higher education providers setting both quantity and price. Most of the centrally allocated postgraduate places are in the funding clusters used for teaching, nursing and allied health-related courses, and outside these fields the federal government has little direct influence on what universities offer at the postgraduate level. Markets are the only significant influence on what places are offered to international students, although demand is influenced by government decisions on migration criteria. Market-based alternatives to distributing Commonwealth-supported undergraduate places have been suggested on a number of occasions, but to date without success. In 1998, a federal government policy review recommended a system driven by student demand, but a 1999 cabinet submission intended to implement such a scheme was rejected.ix The higher education sector, with the exception of a few individual vice-chancellors, opposed the submission’s policy thrust.x In more recent times, the Group of Eight, a lobby group of the major research universities, has advocated allocating places via scholarships given to individual students (Group of Eight 2007). This view is shared by Macquarie University Vice-Chancellor Steven Schwartz, private higher education providers (see Schwartz 2008, pp. 14–18),xi and myself.xii In December 2008, a review of higher education policy commissioned by federal education minister Julia Gillard recommended a voucher scheme for higher education (Department of Education, Employment and Workplace Relations 2008b). The review’s report—the Bradley Review—proposed extending the voucher scheme to include private providers of higher education and TAFE institutes for their diploma and above qualifications.
In the public vocational sector, centralised data-gathering helps steer the system. An NCVER-commissioned study of VET planning processes around Australia identified use of econometric modelling, industry advice, industry studies, area studies, demographic projections and skilled migration research (Keating 2008, pp.17–24). The federal government is following this approach with the establishment of Skills Australia. Its functions include analysing current and emerging skills needs, distributing results of its research to businesses and workers to inform their training and employment decisions, advising government on skills needs, ongoing reforms to education and training, and working with the relevant state bodies to align priorities and responses to skills needs (Skills Australia 2008). A Skills Australia discussion paper raises the possibility of its taking a dominant role in advising governments on skills needs, including a national pooling of all public funds. However, it also sees a role for ‘increased devolution of purchasing decisions to industry and consumers’ (Skills Australia 2008, p.11). This latter path is being followed by the Victorian Government which, with some restrictions on student eligibility, will let providers, including TAFE institutes, deliver ‘government subsidised training in response to demand rather than by fixed allocation’ (Victorian Government 2008, p.23). If the Bradley Review recommendations on the inclusion of all diploma courses in a voucher scheme were adopted, outside Victoria it could mean quite different allocative mechanisms for diplomas and certificate IV and below courses. Although, as in higher education, the use of greater market mechanisms for distributing public funding is a possibility, recent practice is closer to the central planning model. The annual VET plans agreed between the Commonwealth and the states set out the annual number of contact hours to be delivered, along with other generic cross-industry skills such as ‘business and clerical’ and ‘computing’. In skill shortage areas, the plans include target New Apprentice commencements at the two- or three-digit Australian Standard Classification of Occupations (ASCO) level,xiii and other numerical targets at an industry or qualification level. Victoria’s agreement nominates industries (for example, ‘health’), while New South Wales’s agreement nominates more specific qualifications (for example, ‘Cert III Irrigation’). On top of these industry and course-related requirements, specific types of students are targeted: VET in Schools students, Indigenous students, 15 to 19-year-olds, 20 to 24-year-olds, mature-age students, and people with a disability. At the state level, these plans are implemented through direct allocation to TAFE institutes and through some ‘user choice’ funding. The VET plans require the states to work with TAFE institutes to increase flexibility to meet ‘local industry and community needs’, although ‘within the context of the national requirements of the Skilling Australia’s Workforce Agreement’. The autonomy of individual TAFE institutes in meeting those local needs varies around the country, with most negotiating agreements with state authorities (Keating 2008, pp.19, 17–24). The views of individual TAFE institutes on local needs are taken into account, but are not necessarily decisive. As in higher education, in practice, history appears to be an important allocative principle. While flexibility exists, the starting point in negotiations with TAFE institutes is what they did in the previous year. Under user choice funding, employers and their apprentices and trainees can choose the registered training organisation that receives their government assistance. This may be a TAFE institute or a private provider. This is an example of governments working to mimic markets or using quasi-markets, reflecting concerns about unresponsiveness in the TAFE sector. This may have benefits in fine-tuning course content and improving customer service. However, it is less clear that it constitutes market steering of the system as a whole. Governments still set the broad categories of what it is to be provided, while being neutral on who provides it. The federal government’s Productivity Places Program is open to private providers to act as suppliers of publicly funded vocational education places. There does not appear to be any bias towards TAFE institutes. However, as with the efforts to include the private sector via state plans, private sector delivery does not constitute market steering of the system. The ‘priority occupations and qualifications’ list used to distribute places in 2008 limits them to precise occupations (at the four-digit level) and qualifications, steering public and private sectors towards courses that satisfy these criteria. There are specific numbers of places allocated to job seekers and existing workers, with program guidelines setting out in more detail who is eligible to receive a place. Although the large number of potential courses funded under the Productivity Places Program makes it more flexible than new places programs in higher education, the demand side is more regulated, as higher education institutions may give Commonwealth-supported places to any Australian applicant they choose. 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